If anyone on the planet can afford to head down to the neighborhood mall and indulge in a shopping spree, you’d think it would be the Chinese. After all, they live in an economy that routinely posts growth rates of 9% or higher, resulting in surging incomes and boundless job opportunities. While much of the world experienced GDP contractions and dramatic spikes in unemployment during the Great Recession, China, supported by massive stimulus programs, barely missed a beat. In theory, as income increases, and the prospects for future earnings become brighter, families should be more willing to postpone savings and spend now.
But in China, just the opposite is happening. It’s still proving difficult to convince the average Chinese to part with his or her money, even though his or her stash of cash is bigger than ever. Sure, Chinese consumers are spending more and more each year on items like cars and appliances. But simultaneously, the urban Chinese household saves twice as much of its income today as 20 years ago – from 15% in the early 1990s to over 30% in recent years. Oddly, as Chinese incomes have grown, so has their propensity to save.
The fact that Chinese are saving more is of great importance to all of us. Getting the Chinese to spend is necessary to restore the global economy to true health. If the world is to “rebalance” – or eliminate the massive surpluses and deficits that underpinned the Great Recession – consumers in surplus nations like China need to spend more. If they did, China would import greater quantities of stuff from the rest of the world and reduce its giant trade surplus, while simultaneously shifting China’s sources of growth away from its unhealthy dependence on investment (in sectors like property). However, the role of consumer spending in China’s economy has been heading in the wrong direction. Private consumption accounted for 46% of GDP in 2000; by 2009, that ratio had fallen to about 35%. Very simply, the sources of Chinese growth aren’t rebalancing, and without that, the entire global economy can’t rebalance either.
Why won’t the Chinese loosen their wallets? A new study by economists Marcos Chamon, Kai Liu and Eswar Prasad sheds some light on the financial calculations of the average Chinese. After studying Chinese statistical surveys of household incomes dating back to the 1980s, they conclude that even though Chinese incomes have increased, so has the uncertainty Chinese feel about their income, due to the market-oriented nature of Chinese reforms. And as a result of that heightened uncertainty, Chinese are more inclined to save a larger proportion of their income even in a rapid-growth economy.
This study shows just how much more spending power the Chinese have gained over the years. From 1989 to 2006, average annual household income almost tripled, from RMB12,830 to 32,040 in real terms. (To give you an idea, at current exchange rates, that’s a jump from about $1,900 to $4,800.) That increase in income is without question a result of the dismantling of the Communist command economy in China, a process started by Deng Xiaoping in the late 1970s. Those reforms expanded the role of the private sector, gave the average Chinese more freedom over how they work, and opened up the economy to the world through foreign investment and trade.
But those same capitalist reforms have also made the life of the average Chinese riskier. Instead of permanent employment at state-owned or collective enterprises (SOCEs), Chinese workers are more likely to have jobs in the private sector where job security is not as guaranteed. In the sample used in this study, the proportion of workers employed in the SOCE sector fell dramatically from 81% in 1989 to 64% in 2006. Even for those workers still employed by SOCEs, the terms of employment are not as secure as they used to be. State companies in China have gone through their own painful process of market reform, to make them more competitive with private firms and more profitable. Jobs in those state enterprises are no longer locked in for life either, while wages are linked more to performance and productivity. Here’s a bit from the study:
The transition from a centrally planned economy to a market economy may have resulted in an increase in firm-level volatility related in part to state enterprise restructuring and an increase in the link between wages and firm-level performance. Wages paid to workers may be increasingly tied to firm performance and more reflective of individual productivity due to tightening of budget constraints on SOCEs, increased competition and more openness to foreign trade.
On top of that, Chinese workers have also had to adjust to a new pension scheme. Pensions were once paid by enterprises, but in 1997, a national system was introduced with “individual accounts” that hold retirement contributions from both employer and employee. This new system seems to have caused Chinese workers to fret that they won’t have enough of a nest egg for their golden years – and likely with good reason. Retired workers are probably seeing reduced pension payments compared to their pre-retirement income in the new system compared to the old.
The result of these changes to the Chinese economy is a U-shaped savings pattern. Savings rates are higher among younger people – who feel the need to set aside a “buffer” of savings for protection against greater income uncertainty – and older folks – who are beefing up savings for their retirement. Here’s more from the study:
Higher income uncertainty and pension reforms can together explain much of the rise in average savings among urban households in China…Moreover, the calibrated response to saving rates implies changes to the cross-section of savings over time that are sharper among households at the two ends of the age distribution of household heads. Even 10 years after the initial increase in uncertainty and pension reform, we estimate the youngest and the oldest households save 5 percentage points more than before those changes, compared to only 2.5-3.5 percentage points more for those in their late thirties-early forties.
The Chinese government is fully aware of the impact market reform has had on income security, and thus on the country’s efforts to rebalance its economy, and policymakers are striving to address it by building up the confidence of the Chinese consumer. The government, for example, is undertaking a massive investment in healthcare to convince Chinese they don’t have to save as much to cover possible medical bills. But the process of making Chinese feel secure enough to spend will be slow. Whatever Chinese policymakers do, they can’t eliminate the greater degree of risk inherent in an economic system based on free enterprise. Short of returning to the old socialist system of worker protection, the average Chinese family is going to have to adjust to the new realities of a market-oriented economy – both the potential upside (greater income potential, more job choice) and the downside (less job security, fewer automatic benefits). Remember, many of these market-based reforms are still very new to the Chinese (10-15 years old), so they’re just not accustomed to the level of uncertainty that comes with capitalism. In other words, the Chinese are in the process of dealing with the kind of risks that Americans have faced for centuries.
The Chinese are thus saving more to protect themselves. That may be wise for their own personal security, but not necessarily all that great for the world economy. Confidence in the future, even one as bright as China’s, won’t be created overnight, whatever Chinese policymakers attempt to do. So don’t expect the Chinese consumer to swoop in and save the world economy, and least not these days, when it badly needs saving.